The Bank of Japan just made a historic rate pivot. Here's what could happen next

Japan's central bank on Tuesday finally ended its experiment with negative rates and unconventional easing tools which were aimed at reflating the world's fourth-largest economy.

The Bank of Japan's decision came just days after Rengo, Japan's largest federation of trade unions, said ongoing "shunto" wage negotiations between Japan Inc and unionized employees have so far yielded a provisional weighted average 3.7% spike in base pay. This was even more robust than last year's gains, which were the steepest in three decades.

BOJ Governor Kazuo Ueda had repeatedly said these talks would be key to sustainable price increases that would inform any decision to hike rates for the first time in 17 years. BOJ policymakers expect higher salaries to lead to a virtuous spiral with domestic demand fueling inflation.

Prior to Tuesday, the BOJ had barely budged from its ultra-loose monetary policy posture despite "core-core inflation" — which excludes food and energy prices — exceeding its 2% target for more than a year, as policymakers viewed that price increases were largely imported from overseas.

"The BOJ has taken a bit of a punt today on the expectation that the very substantial wage increases in a great number of firms is actually going to deliver household spending growth," Rob Carnell, head of Asia Pacific research at ING, told CNBC Tuesday after the BOJ released its decision after its March policy meeting.

"At the moment, they don't know that," he cautioned.

The BOJ will now look to utilize its short-term interest rate as its primary policy tool. It will employ an interest rate of 0.1% to current account balances held by financial institutions at the central bank from March 21, while encouraging the uncollateralized overnight call